An income annuity is a well-known financial vehicle used to pay a person a certain sum of money in a series of distributions made at regular intervals, such as monthly or annually, based on a given amount of principal from an initial contribution of assets. Income annuities are available in many forms. The distributions may be made for a predetermined definite period, as in an annuity certain, or for as long as the person lives, as in a life annuity. Payments under a life annuity may terminate on the annuitant's death, as in a straight life annuity, or may continue to a beneficiary for a specified period after the annuitant's death, as in a life annuity with period certain. Alternatively, a life annuity may be based on two lives jointly, as in a joint and last-survivor annuity in which payments continue to be made to the survivor for the remainder of his or her life, or may provide a beneficiary a lump sum payment upon the death of the annuitant. The payments under an income annuity may be set to begin one payment interval after purchase of the annuity, as in an immediate income annuity, or after a specified amount of time, as in a deferred income annuity.
Individual Retirement Accounts (“IRAs”) and tax-deferred retirement plans are widely used as tax-deferred investment vehicles to provide retirees with income after their retirement. Upon retirement, a retiree may have access to one or more such tax-deferred investment vehicles as well as other liquid assets that have accumulated over time. Because the assets in these investment vehicles may be an important source of income for the remainder of his or her life, it is extremely important for the retiree to make optimal use of them. Clearly, it is vital for the retiree to not consume the assets too quickly and instead retain sufficient funds on which to live thereafter. Conversely, many retirees also find it undesirable to consume assets too slowly, thus making sacrifices in their standards of living, and then die owning substantial assets that often pass to their children who may not need them.
In addition, retirees often consider it highly important to keep their retirement assets substantially liquid, i.e., to be able to withdraw as cash or to convert to cash all or a large portion of the assets on relatively short notice, such as in the event of a medical emergency or family celebration. Therefore, it is important that the assets not be locked up in a financial vehicle that makes them inaccessible or illiquid.
One existing offering which offers some measure of liquidity is discussed in U.S. Pat. No. 5,933,815 entitled “COMPUTERIZED METHOD AND SYSTEM FOR PROVIDING GUARANTEED LIFETIME INCOME WITH LIQUIDITY.” This annuity offering addresses problems with short-term liquidity issues for annuities, by using a guaranteed financial vehicle for a defined period to allow the annuity owner to withdraw funds. This annuity offering allows flexibility in the selection of investment vehicles to accommodate varying income distributions.
There are other existing annuity offering options available, such as a flexible premium income annuity in the tax-qualified market. This annuity offering provides for flexible premium payments but is offered only as an Individual Retirement Annuity in the tax-qualified market. These systems are limited in their product features and payment options by the tax code provisions governing tax-qualified annuities. For example, the tax code does not allow tax-qualified annuity products to offer an increasing payment unless the total expected payments at policy issue are greater than the premium.
Another available annuity offering includes a fixed deferred income annuity that allows for flexible premiums, but do not include investment options relating to variable deferred income products or variable deferred accumulation annuities. This available annuity is restricted by delayed pay-outs on the investments. Investors have the ability to make multiple premium payments, but do not have the ability to receive an immediate pay-out by virtue of the investment being in a deferred income annuity.
Another available annuity product is a flexible premium accumulation annuity, which offers a feature similar to a guaranteed minimum income benefit, but is not a deferred income annuity. Rather, this annuity is akin to a savings account or other type of basic investment vehicle. Unlike an income annuity, this annuity has a cash value (i.e., the investor retains ownership of the invested funds) and does not leverage mortality risk pooling, which allows an insurer to pay income benefits to policy owners who live beyond life expectancy partly with premium paid by policy owners who predeceased their life expectancy.
With existing annuity offerings, problems still exist regarding the financial contributions for establishing the income annuity. Present systems operate by receiving an initial single contribution. This limits the income annuity owner by requiring available funds at the establishment of the annuity. As a person matures, their financial conditions can change, such as being able to afford greater annuity benefits at a later point in time. Additionally, the person may not have the funds readily available at the time of the inception of the income annuity, but may still wish to invest in an income annuity that would allow additional contributions at a later time. Under existing income annuity programs and offerings, the person is precluded from acquiring such annuity above the level of funds directly on hand to pay the initial premium and/or is precluded from making additional contributions at a later time. If additional funds became available, the investor would have to purchase another annuity instead of being able to have the greater convenience and simplicity of merely supplementing an existing annuity. Therefore, there exists a need for an income annuity allowing for flexible premium payments.